Friday, September 14, 2012

Today we present a guest post from Barbarian Capital (follow them on Twitter as well) with the case for shorting English Premier League football club: Manchester United (MANU). Shares recently IPO'd and were priced at $14, below their expected range of $16-18. Since then, MANU has drifted down to $12.xx, where it currently trades.

If you found it unusual that one of the most storied teams in the history of soccer would do its IPO in the US, you’re not alone. MANU was rumored to be considering an IPO in Asia (as have a fair number of European luxury brands), and, yet, the deal was done in New York. This is akin to the NY Yankees IPOing in Moscow. The devil (pun intended) is in the details: Manchester United, founded in 1878, was able to qualify as an “emerging growth company” under the new JOBS Act that loosened the compliance requirements for smaller public companies. This is a clear case of regulator shopping and a major red flag, especially considering that the company is very well established and was publicly traded in the UK before the Glazer takeover. It is difficult to see an upside for the individual investor.

Major Corporate Governance Problems

There are a few points here. One is dual-class shares. While the Glazers want you to have all of the downside economic risk, they are keeping the high-vote Class B shares all to themselves. An outside investor cannot win from a dual-class structure, and there are plenty of abuse examples (NY Times, Dillards, Dover Motorsports, etc.) There is a large number of related party transactions, including, but not limited to Manchester United loans to the Glazers, consulting fees to the Glazers and the Glazers also being creditors to the club (they hold a certain percentage of the debt, obviously a conflict). Finally, only half of the IPO money went to the club for debt reduction. The other half was pocketed by the Glazers: if MANU has so much upside, why are they not keeping the shares?

The Competition is Irrational

Let’s spell it out: sports teams are billionaire hobby toys. They are not rationally run businesses: the owners will fund large losses due to expensive player contracts to win. Acquiring marquee players is a hamster wheel, year after year after year. As a shareholder in MANU, you are signing up to compete with the spending powers of Arab oil sheiks (i.e. Manchester City, current champions) or Russian oligarchs (i.e. Chelsea, a top 3 team over the last decade). Eventually, the enthusiasm runs out but we are not there yet in the major European and US leagues (we’re seeing it on the fringes, like the bankruptcies of the Glasgow Rangers in the Scottish Premiership or the Phoenix Coyotes in the NHL or the LA Dodgers in the MLB). Good businesses spend little on capital expenditures on an ongoing basis, bad businesses spend a lot every year. Unfortunately, players are not warrantied like a machine is. Here’s Manchester United’s spend:

Publicly-Traded Soccer Teams Record

The track record of publicly traded soccer teams is an unmitigated disaster. Here is something from Saxobank analyst Sverrir Sverrirsson.

Most of the teams have had negative IPO-to-now/IPO-to-end return. From the positive teams, two are in the English Premiership, so they rode the big media money wave from the 1990s/2000s when the EPL was getting established. I don’t know what to say about the Turkish teams (assuming the returns are in constant currency, not nominal Turkish lira returns). The performance of these IPOs is incontrovertible evidence (well, at least for me) that soccer team ownership is a hobby, not a business.

MANU's revenues are roughly split in 1/3rds: broadcast, commercial/sponsorships/licensing and attendance. All are close to peak, in my view.

Simply put, MANU is a very successful but already a very heavily monetized brand. Unlike their cross-town rivals Manchester City who just won their first title in 40-50 years or (expected) up-and-comer Paris Saint Germain, MANU is a true dynasty. Here is a look at their performance: ask yourself, can it get any better?

Since MANU does not control the TV contracts (those are handled by the English Premier League for the EPL games and UEFA for the UEFA Championship League; in total, MANU is available for viewing in 210 countries), MANU can control only the “highlights and behind-the-stages” mobile product, ALREADY available in 42 countries. The mobile product has grown nicely, now accounting for GBP 16mm after doubling for two years in a row. The EPL contract was re-signed in June 2012 (with MANU benefiting) and UEFA is sold country by country, so the danger of a blockbuster contract signing is low).

“Peak sponsorship” is the other problem. MANU has been aggressively growing the roster of sponsors (i.e. Smirnoff is their Asian “responsible drinking partner”, whatever that is; DHL is a “training kit sponsor”; etc.). The biggest chunk is the most visible sponsorship, the jersey. MANU’s revenue growth there is impressive:

But there is a MAJOR problem that I have not seen anyone in the mass media mention yet. Chevrolet will be their next jersey sponsor. However, GM’s head of marketing just got fired on the spot (!) over the MANU sponsorship deal, as he apparently tried to hide the true cost of the contract across a few accounts (until a whistleblower reported it). GM is one of the largest, most sophisticated ad buyers in the world, and if they balk at the MANU sponsorship costs, you can bet they are not the only ones.

MANU’s licensed products are already available in 130 countries, and are obviously very dependent on the team’s ongoing “star power”.

The final revenue stream is gameday attendance and related. The problem there is that attendance for their home games is has been at 99% capacity for the last 15 years. Future ticket increases will only worsen the already tense relationship between the unwelcome ownership group and the team fans. The stadium was expanded in 2006, and any further expansion will be coming from the shareholders’ pockets. The question is not only capacity: MANU already plays close to the maximum number of games at home. The EPL is one of the larger leagues in soccer, and the team usually advances pretty far in all other tournaments (UEFA Champions League, the Carling Cup, etc.).

Key Person Risk

MANU has exceptional key person risk. Right now, it is probably concentrated in their star strikers (no one pays to see a great defensive tackle) and their longtime coach, Sir Alex Ferguson. Injuries and the coach’s eventual departures will mean either worse results or big spending in the market to attract replacement talent.

Credit Risk

MANU carries GBP 360 mm in debt after the IPO proceeds. While not a crazy level of leverage, debt adds risk. The team paid a call premium to retire a portion of it with the IPO proceeds.

Guidance for FYE 6/30/2012 Is Poor

Under “Recent Developments” in their filing, MANU discuss a 3-5% revenue drop to GBP 315-320 mm due to fewer home games and lower UEFA TV revenue. EBITDA will be down 16-18% to under GBP 100 mm. Earnings would have been mildly negative, save for a GBP 28 mm tax credit. So, EV/Revenues is at 5.2x and EV/EBITDA is at 16x.

Relative Valuation

MANU’s valuation is very high compared to the two closest publicly traded comparables, Borussia Dortmund in Germany and Juventus in Italy (both major championship brands in major media markets). BVB.GR EV/Sales is 1.2x and EV/EBITDA is 4.1x, JUVE.IM has negative EBITDA and earnings; EV/Sales is 1.8x. (Bloomberg data) So, MANU is at 3-4x the relevant metrics of the comparables. Should it trade at a premium? Sure. But should it be so high? Probably not. It is easy to see 50% downside from here, just as it easy to see 50% upside on “vapor”, why not?

Recent Transfer of Robin van Persie

MANU spent GBP 30 mm in September 2008 to sign Tottenham striker Berbatov, who went on to become the top scorer in the league for 2010/11. Berbatov was benched for most of the 2011/12 season, and MANU lost the title to Manchester City on goal difference. MANU just paid GBP 22 mm to Arsenal for the 2011/12 league top scorer, Robin Van Persie. RVP is reportedly personally getting GBP 200k per week (GBP 10.4 mm per year). These are material expenses and material future liabilities that MANU has not (yet) filed with the SEC. You’d think that spending 20% of your EBITDA on a player and then promising him 10% for the year would be material. This situation illustrates a few of the problems highlighted here: constant capex spending on “stars”, high “key person” risks, lack of proper disclosure of material expenses and off-balance sheet liabilities.

Dearth of Natural Buyers

Who would own this stock? It is not clear to me who would be a natural, long-term, strong-hand buyer of the stock at these levels. One would have expected that a strong retail fan base would be good (as is the case with the Green Bay Packers “stock” or some of the Spanish teams) but the team IPOed in the US. While currently sizable enough, the non-US domicile and operations of the company, along with its problematic governance and looser financial control requirements, might keep some investors out. The drop in the IPO price to $14 from the initial range of $16-$20, along with Jefferies being lead left underwriter, makes me think that no one came to the party. The high borrow cost and lack of shares to short are also indicative of market pessimism.

Risks

- Irrational valuations can stay irrational for long periods of time
- Low float and high short interest make the stock prone to short squeezes
- One big name, well respected holder thus far (Soros Fund disclosed a stake at the IPO)
- The new Premiership TV contract not properly priced in, leading to a positive "surprise" forward projections
- UEFA Champions League advance (vs. the highly unusual group stage elimination last season) means more home games, thus "lapping easy comps"
- Stock trading on how the team is doing (and they usually do well)
- Stock purchases in the open market by an entity as a prelude to an outright exit by the Glazers

Disclosure: positioned to profit from a decline in the stock; the position can change at any time; information sourced primarily from the Securities Exchange Commission and other sources believe to be accurate; however the information here is presented without warranty for discussion purposes only.

Today we present a guest post from Barbarian Capital (follow them on Twitter as well) with the case for shorting English Premier League football club: Manchester United (MANU). Shares recently IPO'd and were priced at $14, below their expected range of $16-18. Since then, MANU has drifted down to $12.xx, where it currently trades.

If you found it unusual that one of the most storied teams in the history of soccer would do its IPO in the US, you’re not alone. MANU was rumored to be considering an IPO in Asia (as have a fair number of European luxury brands), and, yet, the deal was done in New York. This is akin to the NY Yankees IPOing in Moscow. The devil (pun intended) is in the details: Manchester United, founded in 1878, was able to qualify as an “emerging growth company” under the new JOBS Act that loosened the compliance requirements for smaller public companies. This is a clear case of regulator shopping and a major red flag, especially considering that the company is very well established and was publicly traded in the UK before the Glazer takeover. It is difficult to see an upside for the individual investor.

Major Corporate Governance Problems

There are a few points here. One is dual-class shares. While the Glazers want you to have all of the downside economic risk, they are keeping the high-vote Class B shares all to themselves. An outside investor cannot win from a dual-class structure, and there are plenty of abuse examples (NY Times, Dillards, Dover Motorsports, etc.) There is a large number of related party transactions, including, but not limited to Manchester United loans to the Glazers, consulting fees to the Glazers and the Glazers also being creditors to the club (they hold a certain percentage of the debt, obviously a conflict). Finally, only half of the IPO money went to the club for debt reduction. The other half was pocketed by the Glazers: if MANU has so much upside, why are they not keeping the shares?

The Competition is Irrational

Let’s spell it out: sports teams are billionaire hobby toys. They are not rationally run businesses: the owners will fund large losses due to expensive player contracts to win. Acquiring marquee players is a hamster wheel, year after year after year. As a shareholder in MANU, you are signing up to compete with the spending powers of Arab oil sheiks (i.e. Manchester City, current champions) or Russian oligarchs (i.e. Chelsea, a top 3 team over the last decade). Eventually, the enthusiasm runs out but we are not there yet in the major European and US leagues (we’re seeing it on the fringes, like the bankruptcies of the Glasgow Rangers in the Scottish Premiership or the Phoenix Coyotes in the NHL or the LA Dodgers in the MLB). Good businesses spend little on capital expenditures on an ongoing basis, bad businesses spend a lot every year. Unfortunately, players are not warrantied like a machine is. Here’s Manchester United’s spend:

Publicly-Traded Soccer Teams Record

The track record of publicly traded soccer teams is an unmitigated disaster. Here is something from Saxobank analyst Sverrir Sverrirsson.

Most of the teams have had negative IPO-to-now/IPO-to-end return. From the positive teams, two are in the English Premiership, so they rode the big media money wave from the 1990s/2000s when the EPL was getting established. I don’t know what to say about the Turkish teams (assuming the returns are in constant currency, not nominal Turkish lira returns). The performance of these IPOs is incontrovertible evidence (well, at least for me) that soccer team ownership is a hobby, not a business.

MANU's revenues are roughly split in 1/3rds: broadcast, commercial/sponsorships/licensing and attendance. All are close to peak, in my view.

Simply put, MANU is a very successful but already a very heavily monetized brand. Unlike their cross-town rivals Manchester City who just won their first title in 40-50 years or (expected) up-and-comer Paris Saint Germain, MANU is a true dynasty. Here is a look at their performance: ask yourself, can it get any better?

Since MANU does not control the TV contracts (those are handled by the English Premier League for the EPL games and UEFA for the UEFA Championship League; in total, MANU is available for viewing in 210 countries), MANU can control only the “highlights and behind-the-stages” mobile product, ALREADY available in 42 countries. The mobile product has grown nicely, now accounting for GBP 16mm after doubling for two years in a row. The EPL contract was re-signed in June 2012 (with MANU benefiting) and UEFA is sold country by country, so the danger of a blockbuster contract signing is low).

“Peak sponsorship” is the other problem. MANU has been aggressively growing the roster of sponsors (i.e. Smirnoff is their Asian “responsible drinking partner”, whatever that is; DHL is a “training kit sponsor”; etc.). The biggest chunk is the most visible sponsorship, the jersey. MANU’s revenue growth there is impressive:

But there is a MAJOR problem that I have not seen anyone in the mass media mention yet. Chevrolet will be their next jersey sponsor. However, GM’s head of marketing just got fired on the spot (!) over the MANU sponsorship deal, as he apparently tried to hide the true cost of the contract across a few accounts (until a whistleblower reported it). GM is one of the largest, most sophisticated ad buyers in the world, and if they balk at the MANU sponsorship costs, you can bet they are not the only ones.

MANU’s licensed products are already available in 130 countries, and are obviously very dependent on the team’s ongoing “star power”.

The final revenue stream is gameday attendance and related. The problem there is that attendance for their home games is has been at 99% capacity for the last 15 years. Future ticket increases will only worsen the already tense relationship between the unwelcome ownership group and the team fans. The stadium was expanded in 2006, and any further expansion will be coming from the shareholders’ pockets. The question is not only capacity: MANU already plays close to the maximum number of games at home. The EPL is one of the larger leagues in soccer, and the team usually advances pretty far in all other tournaments (UEFA Champions League, the Carling Cup, etc.).

Key Person Risk

MANU has exceptional key person risk. Right now, it is probably concentrated in their star strikers (no one pays to see a great defensive tackle) and their longtime coach, Sir Alex Ferguson. Injuries and the coach’s eventual departures will mean either worse results or big spending in the market to attract replacement talent.

Credit Risk

MANU carries GBP 360 mm in debt after the IPO proceeds. While not a crazy level of leverage, debt adds risk. The team paid a call premium to retire a portion of it with the IPO proceeds.

Guidance for FYE 6/30/2012 Is Poor

Under “Recent Developments” in their filing, MANU discuss a 3-5% revenue drop to GBP 315-320 mm due to fewer home games and lower UEFA TV revenue. EBITDA will be down 16-18% to under GBP 100 mm. Earnings would have been mildly negative, save for a GBP 28 mm tax credit. So, EV/Revenues is at 5.2x and EV/EBITDA is at 16x.

Relative Valuation

MANU’s valuation is very high compared to the two closest publicly traded comparables, Borussia Dortmund in Germany and Juventus in Italy (both major championship brands in major media markets). BVB.GR EV/Sales is 1.2x and EV/EBITDA is 4.1x, JUVE.IM has negative EBITDA and earnings; EV/Sales is 1.8x. (Bloomberg data) So, MANU is at 3-4x the relevant metrics of the comparables. Should it trade at a premium? Sure. But should it be so high? Probably not. It is easy to see 50% downside from here, just as it easy to see 50% upside on “vapor”, why not?

Recent Transfer of Robin van Persie

MANU spent GBP 30 mm in September 2008 to sign Tottenham striker Berbatov, who went on to become the top scorer in the league for 2010/11. Berbatov was benched for most of the 2011/12 season, and MANU lost the title to Manchester City on goal difference. MANU just paid GBP 22 mm to Arsenal for the 2011/12 league top scorer, Robin Van Persie. RVP is reportedly personally getting GBP 200k per week (GBP 10.4 mm per year). These are material expenses and material future liabilities that MANU has not (yet) filed with the SEC. You’d think that spending 20% of your EBITDA on a player and then promising him 10% for the year would be material. This situation illustrates a few of the problems highlighted here: constant capex spending on “stars”, high “key person” risks, lack of proper disclosure of material expenses and off-balance sheet liabilities.

Dearth of Natural Buyers

Who would own this stock? It is not clear to me who would be a natural, long-term, strong-hand buyer of the stock at these levels. One would have expected that a strong retail fan base would be good (as is the case with the Green Bay Packers “stock” or some of the Spanish teams) but the team IPOed in the US. While currently sizable enough, the non-US domicile and operations of the company, along with its problematic governance and looser financial control requirements, might keep some investors out. The drop in the IPO price to $14 from the initial range of $16-$20, along with Jefferies being lead left underwriter, makes me think that no one came to the party. The high borrow cost and lack of shares to short are also indicative of market pessimism.

Risks

- Irrational valuations can stay irrational for long periods of time
- Low float and high short interest make the stock prone to short squeezes
- One big name, well respected holder thus far (Soros Fund disclosed a stake at the IPO)
- The new Premiership TV contract not properly priced in, leading to a positive "surprise" forward projections
- UEFA Champions League advance (vs. the highly unusual group stage elimination last season) means more home games, thus "lapping easy comps"
- Stock trading on how the team is doing (and they usually do well)
- Stock purchases in the open market by an entity as a prelude to an outright exit by the Glazers

Disclosure: positioned to profit from a decline in the stock; the position can change at any time; information sourced primarily from the Securities Exchange Commission and other sources believe to be accurate; however the information here is presented without warranty for discussion purposes only.

Disclaimer

The content provided within this website is property of MarketFolly.com and any views or opinions expressed herein are those solely of MarketFolly.com and do not represent that of any firm or institution. This website is for educational and/or entertainment purposes only. Use this information at your own risk. MarketFolly.com is not an investment advisor of any kind, so do not consider anything on this page to be legal, tax, or investment advice. MarketFolly.com is not responsible for any third party links or content.